| This dissertation develops nine stylized facts that summarize the major consequences of deregulation and tests these against recent experience in the electric utility industry.; The experience of the electric utility industry matches the predictions of the stylized facts, except in one instance: although real electricity prices fell between 1982 and 1999, real prices fell less in states that deregulated. This dissertation presents three possible explanations for this discrepancy. First, through dynamic efficiency, consumers may benefit in the long run through lower rates and better service in the electricity market, or deregulation may be a public good that benefits electricity consumers through economy-wide improvements in efficiency. Second, higher prices may be a long-run outcome as predicted by the theory of the second best. Or third, both regulators and utilities may use deregulation to generate new rents. Because the original rents from regulation had dissipated, new rents could be generated under deregulation by making consumers pay off the utilities and then creating more new rents through re-regulation of the industry.; Close examination tends to support the first and third explanations, although the second-best explanation cannot yet be ruled out completely. Higher prices appear to be a transitional phenomenon, resulting from a short-term payoff from consumers to incumbent utilities that was required to move deregulation forward. This payoff occurs as residential and commercial consumers bear relatively higher rates over three to five years to compensate utilities for stranded costs, investments thought to be unrecoverable under full competition. All states are benefiting from deregulation, but states that are deregulating are benefiting less while stranded costs are being recovered.; This dissertation also examines California electricity deregulation and finds that the experience in California conforms with to the stylized facts, and that certain structural, demand and supply factors caused the electricity crisis in 2000 and 2001. The most important factor was the disallowance of long-term contracts and other instruments for shedding price risk, which discouraged the construction of new generating plants. |
